As I write this, the stock market as measured by the S&P 500 is down nearly 20% for the year. International developed and emerging markets as measured by the broadly followed MSCI indices have fared even worse. Even bonds are down double digits as measured by the Bloomberg U.S. Aggregate Bond Index. Last month Bank of America stated that the classic 60/40 portfolio was having its worst performance in a century. If you’re looking for reasons to be pessimistic, you have no shortage of targets.
Regular readers may remember the quip popularized by Vanguard founder Jack Bogle, who said in the face of market turmoil, “Don’t just do something, stand there.” His wisdom endures, and you certainly could do much worse than standing there — meaning not making snap decisions with your retirement plan. Over the last 65 years, staying invested in the S&P 500 for 12 months after entering a bear market has paid off handsomely more often than not.
But when you’re worried that your house has declined in value, concerned that your tech job will be cut, unable to afford your first home with mortgage rates more than doubling, or on the verge of retiring and wondering if the market will recover in time — standing there when your fight or flight response is on high alert is an unrealistic expectation. You’re galvanized to do something, but what should it be? Try looking for opportunities that are easier to pursue than when markets are booming.
Cut out the deadwood: Many investors have stocks or mutual funds that they purchased years ago that they’re holding for tax reasons. Maybe it’s a stock from a company you worked at long ago or a mutual fund that was hot in the aughts but has seen better days. It could be a mutual fund with astronomic fees or a stock that has done remarkably well, but now you realize it’s wise to move into something more diversified. With stock prices down and tax losses potentially available with other investments, this could be your time to sell that inadvisable investment in your taxable account.
Divest your equity compensation: Many Boulder County workers are paid in part in equity compensation, which could take the form of stock options or restricted stock units, or RSUs. Unless you’re incredibly fortunate, your company stock price has declined this year. I know it’s hard to see the slide while you’re working in a more-stressed economic environment. Ignore what has already happened and focus on the best path forward. If you have company stock awards that have vested, then you have already been taxed on the value of the shares when you gained the right to sell them.
Let’s take the example of Meta (formerly known as Facebook) and imagine you had 100 shares vest back in March. Back then shares were trading at $210, so you will owe taxes on $21,000 of compensation income. Meta now trades at close to $100 a share and so you would receive $10,000 to sell them. In addition, you would take an $11,000 tax loss that could be used to offset other gains or could reduce your taxable ordinary income. You’re getting paid by the IRS to sell your company stock. If someone were to hand you $10,000, would you plow it back into your company’s stock? You’re doing the same thing by holding onto the shares. If you’re having trouble parting with them, consider retaining enough that you can still celebrate if Meta recovers.
Roth conversions: When you move funds from your pretax account such as an IRA or 401(k) to a tax-free Roth account, you’re choosing to pay taxes now for the privilege of kicking the taxing authorities out of a shared investment. With stock prices down significantly from their highs, this could be a chance to move deflated shares over to a Roth and only owe tax on their current value. All growth in a Roth account can be yours tax-free if you comply with the requirements.
These tools are best wielded in consultation with your financial or tax professional, so review now as many of these strategies cannot be undone. Consider if they apply to your situation, as it may give you a good outlet to use your bear market anxiety to fuel your journey to financial independence.
David Gardner is a Certified Financial Planner professional at Mercer Advisors practicing in Boulder County. The opinions expressed by the author are his own and are not intended to serve as specific financial, accounting or tax advice. They reflect the judgment of the author as of the date of publication and are subject to change.
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